Tesla: Locking In Some Gains

Time To Take Some Risk Off

In the non-spicy portion of our previous post (What Does America Stand For Now?), we mentioned it was a good time for Tesla longs to lower their risk. Herewith, is some elaboration on that. As regular readers know, each day the market is open, our system gauges stock and options market sentiment to select the names it estimates are likely to have the highest returns over the next six months. Tesla has been a frequent top ten name in that daily ranking, including in this top names cohort from two months ago. 

Since then, it’s up more than 32% on not much significant news, beyond its recently announced plans for another stock split. 

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Critics Continue To Highlight Its Valuation

Trevor Scott of Tidefall Capital is one of the latest observers to contrast Tesla’s market cap to that of the rest of the auto industry. 

But this isn’t a new phenomenon, and as Rajesh Sawhney noted a couple of years ago when making a similar comparison, bulls can attribute it to Tesla’s execution.

Tesla Bull Takes Some Off The Top

Cathie Wood of Ark Invest has been a vocal Tesla bull, but on Tuesday two of her company’s funds, her flagship Ark Innovation ETF (ARKK) and Ark Next Generation Internet ETF (ARKW) sold some Tesla shares. 

Another Way Tesla Longs Can Lower Their Risk

If you don’t want to sell some shares here, another way Tesla longs can reduce their risk is by hedging. Here’s one example. Let’s say you have 100 shares of Tesla and are willing to risk a 20% drawdown over the next several months, but not one larger than that. If you were willing to cap your possible upside at 29% over the same time frame, this was the optimal collar hedge to give you that level of downside protection.

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Put leg of Tesla collar

Call Leg of Tesla Collar.

Here, the net cost was negative, so you would have collected a net credit of $375 when opening this hedge, assuming, to be conservative, that you bought the puts at the ask and sold the calls at the bid. Since you can often buy and sell options within the spread, you likely would have received a larger net credit when opening this hedge on Tuesday. 

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